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Much Ado About Nothing

Sam Stovall

Last week, Fed Chair Yellen reminded us that the Fed looks at a wide array of inflation indicators. Since food and energy are particularly volatile, the core Personal Consumption Expenditure (PCE) is used to get a better understanding of inflation trends. In the long run, however, history indicates that the “Headline vs. Core” squabble is much ado about nothing. Since 1960, the median monthly year-over-year percent changes in headline and core CPI were the same at 3.9%, while the two PCE measures averaged 3.5% and 3.4%, respectively. What’s more, the median for both PCE levels were 3.2% at the start of the last 13 rate-tightening cycles, implying that the Fed may let inflation run a bit beyond the 2% target so as not to choke off an economic recovery too soon.